Organizational Meeting and S Corporation Election

Understanding corporation considerations is vital for anyone looking to incorporate their business, especially in states like California. This guide covers essential topics such as the organizational meeting, the S corporation election, and other critical post-incorporation requirements.

Organizational Meeting

Understanding Corporation Considerations: Organizational Meeting

Under California law, the Board of Directors may act in a formal meeting or by unanimous written consent in lieu of an organizational meeting. The sample minutes and consent below cover all necessary steps to complete the incorporation process. These include ratification by the Board of the actions taken by the Incorporator, such as the election of officers, authorization of incorporation expenses, issuance of stock, establishment of a corporate bank account, and approval of agreements.

Establishing the Corporation as a Separate Entity

It is crucial to establish the corporation as a separate entity for liability and tax purposes. Initial stock issuances provide the corporation with adequate capital to meet business needs. The minutes and consent also call for selecting a calendar or fiscal year for the corporation, which must align for both California and federal taxes.

Corporate Bank Accounts and Borrowing

Standard form resolutions establish a corporate bank account and provide for bank borrowing, essential for the corporation’s financial dealings. Each bank has its standard form, and these should be attached to the minutes if a bank is already selected. Banking resolutions adopted in the minutes and consent are broad, designed to permit the corporation to open new bank accounts without returning to the Board for specific approval. However, resolutions for borrowing money or creating lease lines require specific Board authorization.

Adopting a Corporate Seal

Adopting a corporate seal is optional but useful for verifying the execution of certain documents, such as stock certificates, on behalf of the corporation.

S Corporation Election

Understanding Corporation Considerations: S Corporation Election

The Internal Revenue Code allows shareholders of S corporations to operate their business as a corporation while being taxed like a partnership. S corporations do not pay federal income tax but pass tax liabilities for their profits and losses to their shareholders. Consequently, profits earned by an S corporation are taxed only once. Shareholders must include these profits as income when earned by the S corporation, regardless of distribution.

Benefits and Limitations of S Corporations

Shareholders typically elect S corporation status when the corporation is profitable and distributes most of its profits or when the corporation incurs losses, allowing owners to offset these losses against their current incomes. However, the individual income tax rate (39.6%) is higher than the corporate tax rate (35%), making S corporations less attractive for profitable businesses expecting to accumulate earnings rather than distribute them.

To qualify as an S corporation, a corporation must meet specific eligibility requirements:

• Must be organized under U.S. laws and not be a member of an affiliated group of corporations.
• No more than 75 shareholders, all of whom are individuals, certain tax-exempt organizations, qualifying trusts, or estates, and none of whom are nonresident aliens.
• Only one class of stock is permitted, although options and differences in voting rights are generally allowed.

Making the S Corporation Election

The election must be made on Form 2553 and filed with the IRS on or before the fifteenth day of the third month of the corporation’s taxable year. For newly formed corporations, the time period begins on the earlier of the first day the corporation has assets, shareholders, or begins business. The election requires consent from all shareholders, including those with community property interests or trust ownership.

In California, corporations making a federal S corporation election are deemed to have made a state election but must report this to the Franchise Tax Board using Form 3560. If a corporation wishes to be treated as a C corporation for California purposes, it must elect this status explicitly.

Employer Identification Numbers

Corporations must obtain federal and state employer identification numbers for required filings. The federal ID number is obtained using Form SS-4, while the state ID number in California is obtained using Form DE-1.

Statement by Domestic Stock Corporation

California requires corporations to file an annual or biennial statement of information to remain in good standing. This update ensures the records of the California Secretary of State are current.

Business Licenses and Additional Permits

Corporations must also obtain necessary business licenses and permits from city, county, and state agencies, depending on the business type. Examples include food handling permits from the Department of Environmental Health and various tax-related registrations with the IRS, Franchise Tax Board, and State Board of Equalization.

Conclusion

Understanding corporation considerations is crucial for effectively establishing and maintaining a corporation. From organizational meetings and adopting banking resolutions to electing S corporation status and obtaining necessary permits, thorough preparation and compliance with legal requirements ensure a strong foundation for your business. By comprehensively understanding these considerations, you can navigate the complexities of incorporation and set your business up for success.

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